IFRS 13 Residential Mortgage Valuation

We determine a fair market value of Dutch Residential mortgages, in accordance with IFRS 13 using a loan level data provided by the originators.

IFRS 13 does not specify a detailed approach to use for valuing assets and therefore there is no market standard for the valuation of mortgages. The market value is the price that a knowledgeable and willing seller and buyer would agree in an orderly arm’s length transaction at the reference date. IFRS 13 essentially requires to follow the same approach in valuation that such market participants would use to agree on the price.

The Dutch Central Bank (DNB) has published guidance on the fair value determination of Dutch mortgages for prudential purposes. Our valuation method aims to meet both IFRS and prudential requirements:

  1. The amortization type of the mortgages (annuity, linear, bullet)
  2. Time to interest reset of fixed rate mortgages
  3. The guarantee from NHG (if any)
  4. Current loan to value of the mortgage
  5. Product specific-options (caps/floors) including the option of the borrower to prepay without penalty

Further we model on the loan level expected credit loss (compliant with IFRS9), expected prepayments. We follow an extensive process to build these models.

Credit model flow chart explaining all individual steps in the modeling process.

Therefore, our valuations not only take into account the actual point of the cycle but also could be stressed in function of FED or EBA defined or user defined macro scenarios.

In-sample 1t and residuals for the reference default macro model (blue) and a model using the mortgage spread for comparison.

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Details

Open Source Investor Services B.V. (OSIS)
WorldTrade Centre The Hague
Prinses Margrietplantsoen 33
2595 AM The Hague
The Netherlands

[TEL] +31 70 32 60 370
[E-MAIL] info@os-is.com